Being in your twenties can be a tumultuous time. By your thirties, you like to think you have it all figured out. But along the way to stability, many millennials make some mistakes. Some of these mistakes can follow them their entire lives. Here are eight costly money mistakes millennials make and how to avoid them.
1. Financial Foundations
Establishing a strong financial foundation is crucial for long-term success. This involves setting clear financial goals, creating a budget, and prioritizing needs over wants. A key aspect of financial foundations is building an emergency fund, which provides a safety net for unexpected expenses and financial setbacks. Aim to save 3-6 months’ worth of living expenses in a readily accessible savings account. This fund will help you avoid going into debt when unexpected expenses arise, ensuring you stay on track with your financial plan.
2. Consequences of Student Loans
Just because you go to a prestigious university doesn’t mean you’ll end up with a prestigious loan. But you will take on a significant loan debt. Consider that when you’re choosing colleges. Consider your field of study as well. Will that art history degree pay the bills and the loan? And if you’re considering a second degree like a master’s or doctorate, you should determine before borrowing if your degree will generate enough income to justify the expense. Aim to save 3-6 months’ worth of living expenses in a readily accessible savings account or bank account.
3. Failing to Follow a Budget
If you have a budget, you need to follow it. If you don’t have one, you need to make one immediately. If you have a budget, you’ll understand where your money is going and be able to manage your monthly expenses effectively. Not having a budget is one of the fastest ways to financial disaster.
4. Misusing Credit Cards
Don’t live off your credit cards, as it can lead to high credit card balances. Making purchases without thinking can leave you with a big balance at the end of the month. Then, you’ll end up paying interest on top of the interest. Those $50 shoes could end up costing $100 by the time you add in interest. Use your credit card for emergencies or purchases you know you can pay off at the end of the month.
5. Building a Safety Net
Building a safety net is essential for protecting yourself from financial ruin. This involves creating a rainy day fund, which is separate from your emergency fund. A rainy day fund is designed to cover smaller, predictable expenses, such as car maintenance or home repairs. Aim to save 1-2 months’ worth of living expenses in a separate savings account. This fund will help you avoid dipping into your emergency fund or accumulating credit card debt when unexpected expenses arise.
6. Not Having an Emergency Fund
Living for the moment is all well and good until you lose your job or your car breaks down. Stashing some money every month for those emergencies can save your financial future. Even if you’re only putting away $50 a month, it helps. And as your income increases, try to put as much money as possible into your savings.
7. Buying an Expensive Car
It’s just a car, and it depreciates quickly, so it’s never worth what you paid for it. Resist the urge to go for the fancy entertainment package or premium wheels. Instead, put that extra money toward your rainy-day fund or retirement savings accounts.
8. Not Saving for Retirement
When you’re in your twenties or thirties, retirement is the last thing on your mind. But it’s the future, and planning for it now will be easier than waiting until your fifties. Understanding the interest rate on your retirement accounts can help you maximize your savings. Take advantage of your job’s 401 (k). If your job doesn’t have one, consider an IRA. It’s not too soon to talk to a financial advisor.
9. Investing for the Future
Investing for the future is a crucial step in building wealth and achieving long-term financial goals. One of the biggest mistakes millennials make is not taking advantage of compound interest. By starting to invest early, you can harness the power of compound interest to grow your wealth over time. Consider contributing to a 401(k) or IRA, and take advantage of employer matching contributions. Aim to save at least 10% to 15% of your income towards retirement. Additionally, consider diversifying your investments across different asset classes to minimize risk and maximize returns. By investing for the future, you can ensure a secure financial future and avoid making huge mistakes that can derail your financial progress.
10. Living Beyond Your Means
Many millennials want that expensive car or apartment, or they may go out to dinner several times a week. Be mindful of lifestyle inflation, which can occur when you increase your spending as your income rises. Be realistic about your needs when it comes to housing or buying cars. Determine what percentage of your budget can go toward your housing or car payment before you buy or rent. If you get in over your head financially, you can set yourself back years.
Conclusion
The bottom line is to think before you spend. If you can’t afford something, then walk away from it. Ensure you put money away for emergencies and follow your budget. It’s not glamorous, but it will keep you sound financially and help you avoid making financial mistakes that can derail your progress.
